| Until the early
1990s, South Africa was governed by the policy of apartheid
and remained largely isolated from the international economy.
But the apartheid dispensation was dumped following the release
of Nelson Mandela from prison. Shortly thereafter, Mandela
and his party, the African National Congress (ANC), were swept
to power and the South African economy was opened to the world.
South Africa has the most advanced economy in the African
continent and its geographical position provides an ideal
gateway to Sub-Saharan Africa. The country has many opportunities
for international investors, particularly Indian investors,
but it does hold potential risks.
After the end of apartheid, the main opposition party,
the ANC, won the country's first-ever free and fair elections,
in April 2004. The ANC won a two-thirds majority in the
national assembly, enabling it to amend South Africa's constitution.
The Black Economic Empowerment (BEE) charters across all
sectors began being implemented.
Economy
A firmer recovery in external demand, growth in tourism
and continued expansion in total domestic demand is expected
to boost South Africa's real GDP growth in 2005. There has
been a recent revision in the country's GDP data, with improved
coverage of the manufacturing, agricultural, retail and
services sectors. Thus, real GDP growth is estimated to
grow at over 3.5 per cent in 2005.
The most important contributors to the South African economy
are mining, manufacturing and agriculture. Most economic
activity takes place in Gauteng, where the majority of mining
occurs.
The country's financial and industrial infrastructure is
well developed and has excellent growth potential. But South
Africa is plagued by the problem of huge socio-economic
inequalities, which were fostered by the apartheid regime.
This problem continues to manifest itself in the form of
high unemployment rates, widespread poverty and steep increases
in crime. An informal sector has developed as a result of
unemployment and this poses another challenge to the country's
economic development.
South Africa's economic policies are focused on increasing
both economic growth and investment in order to create employment.
Inflation is under control in the country, external debt
is manageable and the degree of political stability is high.
Thus, the economic outlook for the South African economy
is positive.
Industry sectors
Mining is South Africa's largest industry sector, followed
by manufacturing, oil and gas, chemicals, agriculture, and
tourism. The country is globally recognised as a leading
supplier of a variety of minerals and mineral products,
which are exported to as many as 87 countries. Approximately
55 different minerals are produced from more than 700 mining
facilities, with gold, platinum group elements, coal and
diamonds dominating exports and revenue earnings.
However, the structure of the mining industry is set to
change dramatically following the introduction of South
Africa's new mining charter, which cedes all mineral rights
to the state as well as introducing an empowerment component
for all future mining developments in the country.
Agriculture contributes 4 per cent to South Africa's GDP
and consists largely of cattle and sheep farming (only 13
per cent of land is used for growing crops). Clothing, textiles,
the financial services, and banking sectors have recorded
significant growth in recent years. The clothing and textiles
industry has ridden the Africa Growth and Opportunity Act
to earn Rand 791 million in 2001 from exports to the US
alone, an increase of 51 per cent from the previous year.
The conference and exhibition industry earned South Africa
Rand 17.4 billion in 2001 and created 250,000 new jobs.
The country has a 2.5-per cent share of the global market
for this industry.
Investment
Since 1994, the government of South Africa has taken steps
to make the country more open to foreign investment. In
1997, the Department of Trade and Industry launched a national
investment agency called Investment South Africa, tasked
with the promotion of investment at the national and provincial
levels.
The agency also provides investment requirements and makes
opportunities available in every province. There is no restriction
on the extent or type of foreign investment in South Africa.
The government has tried to encourage both foreign and domestic
investment through the introduction of incentives.
Opportunities
A stable government and its commitment to reforms and economic
progress have made South Africa a favourite investment destination.
The country holds a good potential market for India, though
the prevalence of highly inequitable incomes has created
a heavily distorted market.
But, with the ruling ANC determined to remove these distortions
by implementing the Black Economic Empowerment (BEE) agenda
and going ahead with other major reforms, South Africa holds
a lot of promise in the medium term.
- South Africa is the world's fourth fastest-growing
GSM market, with a growth rate of 50 per cent each year.
- The Southern African Development Community (SADC), with
an estimated 250 million consumers, is a large regional
market, but demand from there will depend on the pace
of economic growth and this has been slow.
- The auto industry is a high-value market but, due to
heavy income inequalities, it is distorted. Once the BEE
is implemented, it will result in a more equitable income
distribution. In such a scenario, the market will develop
and provide good opportunities for auto manufacturers.
- The largest South African steel producer is highly cost-competitive.
Input material costs are below the international average
in all cases save for scrap. Wages are less than half
the average, while labour productivity rates are above
average. Process costs are also lower due to the high
quality of iron ore used.
- Countries having plants with lower 'through stage' costs
than the main South African steel plant producing hot-rolled
coil are: Brazil, China, India, Russia and Ukraine. Most
of these have been targets of anti-dumping actions by
South Africa.
- South Africa has about 80 per cent of the world's total
chrome reserves, most of it derived from ores in the Bushveld
Igneous Complex.
- Tourism will remain an important sector for South Africa,
which has considerable untapped potential, particularly
in the two- and three-star segment of the market. However,
there is a need for more investment in the sector if it
is to fulfil its potential.
Key issues
The South African government is keen to attract foreign
investment, but has been slow to remove many of the hurdles
investors face, notably securing work permits for even senior
managers. It has also proved unwilling to provide specific
incentives for foreign investors, although the prospect
of this has been raised on several occasions.
There has been a lot of foreign direct investment in the
country's automotive industry. There is, thus, a potential
for investors seeking domestic, regional and wider export
markets. However, investors will have to address two key
issues:
- BEE: The South African government is firmly committed
to promoting BEE, and investors need to have plans to
include training black workers at all levels of the company
and working with other BEE companies. This is especially
the case if a company has any plans to deal with the government.
- HIV / AIDS: All companies investing in South Africa
should have a carefully developed HIV / AIDS policy, given
the high rates of infection. This should range from direct
provision of healthcare and policies affecting direct
relatives to training staff members.
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